THE HIGH COURT
		No.  1999 32 COS
IN THE MATTER OF MONEY MARKETS INTERNATIONAL STOCKBROKERS LIMITED (IN LIQUIDATION) 
AND
 IN THE MATTER OF THE COMPANIES ACTS
Judgment delivered by Ms Justice Carroll on the 20th October 2000
This is the third of five issues ordered to be tried by order of the 19th of July 1999 by Laffoy J.  The first issue was the subject matter of a Judgment by Laffoy J on the 23rd of May 2000. The third issue is "should K and H Options Limited (K and H) be entitled to claim the sum of £237,030 against client funds of MMI for option premia in respect of settled stock exchange transactions".  It is now calculated by the official liquidator, Tom Kavanagh, that the sum of money should be £321,620. The shortfall in the general clients account (the section 52 account) which excluded the premia monies as per the ledger, at the date of liquidation was £1.1 million. The account should have contained £2.3 million.
	Apart from ordinary stock exchange transactions with a settlement date five days later, MMI as agent for their clients negotiated with K and H for the purchase of named shares on a settlement date three months ahead at a fixed price the (“strike price”). This was a "call option".  Back to back with that was a "put option" under which K and H could call on MMI's client to buy the shares at the strike price on the settlement day.  If the share price had gone up above the strike price on the settlement date, the client made a profit.  If the share price had  gone down below the strike price, the client suffered a loss.  For these options, premia were payable regardless of whether a profit or loss was made.  In the case of settled stock exchange transactions where share premia were payable by a client, the individual client account with MMI was debited with the amount of the share premia.  I am told MMI made a corresponding credit entry in a book showing amounts due to K and H for the share premia.  The status of this accounting practice is not clear.  K and H do not claim to be creditors of MMI.  What is clear that having made the debit entries in the individual client’s accounts the money due to K and H was not always withdrawn from the general client account.  Normally the share premia amounts would have been paid to MMI once a month by cash withdrawal from the clients account.  However in the period before going into liquidation on the 15th of March 1999 (probably September to December 1998) money unpaid to K and H which should have been withdrawn from the general client account but was not, amounted to approximately to £321,620.
	MMI had a statutory obligation under the Stock Exchange Act 1995 (as amended by the Investor Compensation Act 1998) to hold client’s money in what is designated a section 52 account in an institution specified by the Central Bank (section 52 (3)(b) ).
	In the requirements imposed by the Central Bank under section 52 (1) reequirement 7.1 provides that  money ceases to be client money if it is paid 
(a)	to the client 
(b)	 to a third party on the instructions of the client 
(c)	 into any account with a credit institution in the name of the client not being an 	 account which is also in the name of the member firm, or 
(d) 	  to the member firm itself where it is due and payable to the member firm
	Requirement 7.2 provides that where a member firm draws a cheque or other payable order under 7.1 the money does not cease to be client money until the cheque or order is presented and paid by the credit institution.  
	Requirement 8.1 provides that  money may only be paid out of a client account by a member firm in the course of carrying out its activities in accordance with requirement 2.2 (i.e. it must inform a third party that the money is client money) or in circumstances where the money ceases to be client money in accordance with requirement 7.1 (mentioned above) or in accordance with requirement 19.4 (not relevant in this context as it relates to reconciliation difficulties).
	In her Judgment on the first issue Laffoy J held that the official liquidator was not entitled to recoup out of client funds sums due to MMI.  Section 52 (7)(a) as amended by section 64 of the Investor Compensation Act 1998) provides

 "No liquidator, receiver, administrator, examiner official assignee or creditor of investment business firm shall have or obtain any recourse or right against client money or client investment instruments or client documents of title relating to such investment instruments received, held, controlled or paid on behalf of a client by an investment business firm until all proper claims of the clients or of their heirs successors or assigns against client money and client investment instruments or documents of title relating to such investment instruments have been satisfied in full” 

Laffoy J held that the clear and unambiguous meaning of paragraph (a) (is that the beneficial claims of client creditors have to be satisfied in full before anybody else, even a contributor to the ultimate balance, has a call on the funds.
	Mr McCarthy for the official liquidator submitted that the Judgment of Laffoy J disposed of the matter
	Mr Collins for K and H claims that a trust was created in its favour in the client account in respect of money debited in individual clients accounts for premia for completed stock exchange transactions.  It therefore has a proprietary claim, a right in rem, against those monies.  He submits that K and H are not any of the named persons in section 52 and was not party to the issue.  Therefore he was not precluded from making a claim under section 52 because MMI had authority to deduct premia in clients’ accounts and in due course pay K and H.  He claims that once allocated, the money belongs in equity to K and H.  He did concede that in a mixed fund he could not claim to be paid 100%, i.e. in priority to the client creditors who owed K and H nothing, but he said there could be some basis on which an equitable distribution could be made.  He did elaborate later on how this might be achieved.  In support of his proposition he cited Barclays Bank Limited -v-Quistclose Investments Limited (1970 AC507).  In this case where there was a loan to a company by a third person for the  purpose of paying a declared dividend, paid into a separate account opened specially for the purpose, it was held this gave rise to a trust in favour of the creditors and if the trust failed, in favour of the third person.
In Carreras Rothman Limited-v-Freeman Matheus Treasure Limited and another (1985 CH 207), owing to the Defendant’s precarious financial position, a special account was opened into which Carreras Rothman Limited (CR) paid the amount due by the Defendant to third parties who were providing advertising facilities for CR. The Defendant went into liquidation and it was held that the money held in the special account was never held beneficially by the Defendant.  A trust was created and the Plaintiff could enforce the payment of the monies in the special account to the third parties.  
	In General Communications Limited-v-Development Finance Corporation of New Zealand Limited (1999 3 NZLR406), this case concerned the supply of goods by GC Limited to a firm VW.  DFC agreed to advance a sum of money  payable by instalments to VW specifically to purchase equipment.  Later an alteration agreed was that the total advance would be paid to VW’s solicitors who undertook to pay directly to VW suppliers.  After GC supplied goods but before payment, a receiver was appointed to VW.  DFC asked VW’s solicitor to return the balance of funds which they did, getting an indemnity. In a claim by GC it was held that the money once received by the solicitors was held by them on behalf of VW on terms to apply it only to payment of suppliers of equipment and if equipment was not purchased to repay it to DFC.  It was held that DFC had put the funds beyond its power of recall and conferred a beneficial interest on each supplier as each contract of supply was fulfilled.
	Based on the principles enunciated in these cases it was claimed on behalf of K and H that the entry in the individual clients account by MMI crystallised K and H’s interest in the money.  The only other step was the transfer of funds.
	Alternatively there is a claim to a constructive trust in favour of K and H on the basis that it would be inequitable to deny it.  The clients are in debt to K and H and would be unjustly enriched and K and H put to the expense and difficulty of suing individual clients.  
	It was further submitted that MMI was acting within the scope of its fiduciary duty in allocating money for the payment of its liabilities.  If a client instructed MMI to return monies allocated for payment of option premia owed, MMI  would have been entitled to refuse to comply and would not have been in breach of its fiduciary duty.  After the transaction is carried out a client cannot terminate the authority of the agent to make the payment.  
	It is quite clear that K and H’s claim is based on the existence of a trust.  In Mr McQuillian’s affidavit sworn on the 13th of December 1999 on behalf of the credit clients of MMI it was claimed in paragraph 10 that MMI were only entitled to hold monies to the further instructions of clients.  In  Mr Holt’s replying affidavit sworn on the 14th of February 1999 on behalf of K and H (paragraph 5) it is stated that the standard terms and conditions of trade contained authorisations to MMI to make deductions from clients accounts without requirement for each deduction to be specifically authorised and he exhibited two such client’s authorisations.  I was however unable to find the authorisation he mentioned in the exhibits.  However it was not suggested by anybody that MMI did not have authority to pay the share premia on completed transactions to K and H.
	Mr Hardiman on behalf of the investors represented by Mr McQuillian submitted (inter alia) that: 
(1)             K and H could not have a proprietary right in a fund where 	                   there were client investors who owed no money to K and H;
(2)              K and H could not acquire a proprietary interest in the fund as no                       specific fund is identified and there is no properly constituted                             trust;
(3)              The use of the individual client’s account by MMI is consistent                           with contractual obligations not the creation of a trust
4               Section 52 (5) of the Stock Exchange Act 1995 exhausts all equities                  in the client account 
Mr Barnaville for the Central Bank supported Mr Hardiman’s argument.  
	I do not think the Judgment of Laffoy J went so far as to say that no person whatever could make a claim against the section 52 account until the client creditors were paid.  She said the beneficial claim of client creditors had to be satisfied in full before anyone else had a call on the funds.  It seems to me that there could be cases where the beneficial entitlement of client creditors are challenged by persons other than the named persons in the section.  But what I purpose to do first is to examine the claim of K and H to the creation of a trust in portion of the section 52 account monies.  If there is no trust there is no basis for a claim against the monies.
	In my opinion the debit entry in an individual client account cannot be construed as a declaration of trust.  MMI had no authority to create a trust.  It is not disputed they had authority to pay K and H a debt owed by a client for option premia.  Under the Central Bank requirement 7.1 they could pay money to a third party on the instructions of the client.  The fact that it must actually be paid is underlined by requirement 7.2 where it is provided that if it were drawn by a cheque or other order it did not cease to be client money until the cheques/order was presented and paid.
	Therefore as far as share premia were concerned MMI could pay K and H out of the client account.  When it was paid over  it ceased to be client money.  Since the money in this case was not paid out in accordance with requirement 8.1 and  7.1 it never ceased to be client funds.  None of the clients themselves created any trust in favour of K and H.  There was no separate fund designated for the payment of share premia.  In each of the three cases cited by Mr Collins a special fund was created.  No such fund was created here.  It would not in any event have been possible to create a separate designated fund to pay K and H the money it was owed.  The money coming from the client account had to be paid to K and H or it remained client money.  No halfway house arrangement was possible under the requirements.
	In my opinion it is not possible to impose a constructive trust on the grounds of unjust enrichment or any other equitable ground.  The client creditors of MMI had the share premium payments deducted from their account before their net credit balance was calculated.  They have already suffered a loss in respect of this as their contractual liability to pay K and H still remains.  K and H still claim to be entitled to sue each of the MMI clients who owe them money for share premia.
	I am not saying there are circumstances under which a person not named specifically in section 52 can make a claim against an individual client account in a section 52 account.  I purpose to leave that question for a case where there is a basis for making a claim against the beneficial interest of a client creditor.  What I am saying that is if it is possible this is not one of those cases.  The issue must be answered in the negative.